Government subsidies and insufficient investment have resulted in low agricultural productivity, often leaving India with crops that can do little more than meet domestic food demand.
In a word
- Many factors have limited India’s ambitions to become one of the leading food exporters
- Restrictions on rice exports could follow restrictions on overseas wheat sales
- Going forward, India needs to inject market forces into its agricultural economy
Seen as a possible replacement for Ukrainian wheat supplies, India banned exports in May after a heatwave reduced its harvest, underscoring the limitations of the country’s agricultural industry to ease global food shortages. The country has since allowed a few million tonnes of wheat exports, but the current monsoon will determine whether a ban on rice exports will follow.
India believed it could boost its international profile while earning additional revenue as it tried to offset an expected decline in Ukrainian and Russian wheat exports. A combination of weather conditions and inflationary pressures has forced India to scale back those ambitions, reminiscent of the narrow agricultural production margins in which even a large low-income country operates.
Worries over war-stricken wheat supplies from Ukraine and Russia drove world prices higher from March. Around the same time, early projections indicated that India was heading for a record winter wheat harvest of 110 million tonnes, 10% above annual domestic consumption requirements. With an additional 20 million tonnes in stock, Prime Minister Narendra Modi’s government was confident it could export $5 billion worth of wheat. During a virtual meeting with the Indian diaspora in Germany in early May, Mr Modi said: “At a time when the world is facing a shortage of wheat, Indian farmers have stepped forward to feed the world.
Facts and figures
Wheat harvest disappoints
Even as he spoke, however, reality changed. A heat wave in northern India sent temperatures soaring to 45 degrees Celsius, shrivelling grain in the field and reducing the harvest by 10-11 million tonnes. Expecting lucrative export orders, traders had started buying directly from farmers and pushed up domestic prices. In April, domestic wheat prices were up 19% year-on-year, with some regions registering increases of 33%. Lines remained crossed between the agriculture and trade ministries and things came to a head in May. As Indian officials signed export deals abroad, a group of ministers were briefed on how food prices were heading into politically dangerous territory. On May 13, the government announced an immediate ban on all commercial wheat exports. Only government-to-government sales would be allowed, and that on a case-by-case basis. New Delhi also cited evidence that speculators were picking up wheat and hoarding supplies.
Limits to India’s ability to export
Although India’s wheat exports are only a fraction of the amounts traded by Ukraine and Russia, the ban was the latest in a series of trade restrictions announced by various inflation-frightened governments. The ban led to a 4% rise in Chicago grain futures prices. Several governments criticized India, but for New Delhi all that mattered was that domestic wheat prices fell by 6-7%.
Under World Trade Organization rules, India is not allowed to export grain produced using subsidized inputs such as fertilizer and electricity.
However, India has quietly reassured some economically struggling countries that supplies will continue. Bangladesh, which bought almost half of India’s 7 million tonnes of wheat exported last year, has been told it has nothing to worry about. Food aid commitments to Afghanistan, Sri Lanka and Myanmar remained unchanged. At the end of June, India had also promised wheat shipments to the United Arab Emirates, Yemen, Oman and Indonesia.
The Indian government left its wheat stocks untouched. This is partly because the Modi government is using several million tonnes for a rationing program to help poor Indians affected by two years of Covid lockdown (the program is due to run until September 2022). Another reason is that under WTO rules India is prohibited from exporting grain produced using subsidized inputs like fertilizer and electricity. New Delhi has argued for the rule to be relaxed, but it has faced opposition from developed countries at the WTO.
Facts and figures
Government stocks are considerable: 31 million tons of wheat, 33 million tons of rice and 25 million tons of other cereals. Still, new export restrictions are being debated, this time for rice. The Modi government is watching the monsoon, which is currently sweeping across India, as it will determine the size of the autumn crop, which is mostly rice. India is the largest rice exporter in the world. Weather uncertainty, the possibility of expanding food allocations, supplies from friendly neighboring countries and the need for stocks to maintain domestic prices – are all considerations as New Delhi wonders how much is enough.
The most likely path in the coming months is prudent management of domestic grain markets, with exports permitted in dribs and drabs. India had already exported 1.5 million tonnes of wheat before the May ban and another 1.8 million tonnes in the six weeks after. If the upcoming harvest is within the normal range of expected agricultural production, New Delhi could feel confident enough to release a few million more tonnes. This would bring India’s exports close to last year’s levels. Rice export restrictions, potentially the most damaging to world food prices, are unlikely. Existing stocks are large and the monsoon has already covered most of the eastern and southern rice-growing areas. All of this would imply that most export restrictions are lifted by September or October as long as headline inflation does not rise.
A worst-case scenario would follow a failed monsoon and slower economic growth. At this point, a ban on the commercial export of rice would be very likely, along with further restrictions on wheat. The government is expected to deplete its existing stocks to keep prices low and plan rationing programs that could be extended until the end of the year. India is not a major exporter of wheat, but it is crucial to rice markets, and an export ban would drive up world prices. Presumably, all of this would also fuel a global drive towards agricultural protectionism with all the attendant problems that would entail.
A positive impact of this whole episode would be if it inspired a long-term political response. Namely, encouraging the Modi government to make another attempt to inject market forces into India’s agricultural economy. A previous attempt at reform had to be scrapped following widespread protests from farmers who benefited from the existing subsidy structure. India’s intermittent policy response to agricultural exports is a vicious cycle. As farmers lack the resources to invest in higher productivity, India’s agricultural sector generates just enough produce for domestic demand. The best way for farmers to up their game would be to export, earn enough to invest in technology and infrastructure, and boost India’s absurdly low levels of agricultural productivity. The result would be India becoming a genuine and reliable player in global agricultural trade.